Over the past several years, the cost of college has skyrocketed past what many students can borrow to pay for their education. In response, parents have had to step in more frequently to help cover the cost of attendance. After their child graduates, they learn they borrowed federal loans with the highest interest rate and worst repayment options.
As a result, many parents struggle with Parent PLUS Loan repayment. If you can’t pay the Parent PLUS Loans you borrowed, here are 6 options to consider.
Initially, the Federal Direct Parent PLUS Loan payments are based on the Standard Repayment Plan, which pays the loans off over 10 years. If you can’t afford those student loan payments, consider switching to another repayment option.
Income-Contingent Repayment Plan: works great for borrowers with high or low income because it caps monthly payments at 20% of your discretionary income and forgives your loans after 25 years. The eligibility requirements for the ICR Plan only allow parents who have consolidated their loans to make payments under the plan. You can consolidate for free at the Federal Student Aid website, studentaid.gov.
Graduated Repayment Plan: starts you off with lower payments and increases the payment amount every two years. This plan is a good option if your income will grow or you can’t afford the payment under the ICR Plan. You can always switch back to that plan if your income decreases. However, you’ll have to deal with interest rate capitalization.
Extended Repayment Plan: gives you a lower payment by extending your repayment schedule to up to 25 years, which causes you to pay more in interest.
Each of these plans is available to Parent PLUS Loan Loan borrowers regardless of their credit score. But keep in mind, you’ll pay more interest with a longer repayment schedule.
And if those payments are still high, check out the double consolidation loophole. This strategy may help you save more money by giving you access to better IDR plans.
2. Transfer the loan to a spouse or child
If you can’t pay, but your spouse or child can, consider having them refinance the Parent PLUS Loan in their name with a private lender. Your spouse or child can transfer the Parent PLUS Loan into their name if they have a good credit score (e.g., 680+) and a steady income that shows they can afford to pay back the college debt plus their living expenses.
Keep in mind, if your spouse or child can’t qualify to refinance Parent PLUS Loans, they still can help with the payments. Paying for a child’s education falls on the shoulders of both parents. Plus, even though children are not responsible for Parent PLUS Loans, the money was used to pay for their college education. So they likely feel a responsibility to help with the parent loan payments.
As the parent borrower, you remain legally obligated to pay the PLUS loan until its transferred. But getting help from family can make repaying the loan.
Like other federal student loans, Parent PLUS Loans can qualify for different types of forgiveness programs. The two most common forgiveness programs for parents are the Public Service Loan Forgiveness Program and Income-Driven Repayment Forgiveness.
Under the PSLF Program, parents who work in public service can have their loans forgiveness after 10 years of making qualifying payments. If you’re interested in this option, be sure to read up on the PSLF eligibility requirements.
For those who don’t work for the government or a nonprofit, you can get your student loan debt forgiven after 25 years of payments. The income-contingent repayment plan offers parents that have Direct Consolidation Loans forgiveness after they make 300 monthly payments. The drawback with this option is that you’ll have to pay taxes on the amount forgiven.
4. Refinance the Parent PLUS Loan
Refinancing a Parent PLUS Loan for a lower interest rate can lower your monthly payment and interest you’ll pay over time. To qualify for refinancing, you’ll need a strong credit score (usually 680+), a blemish-free credit history, and stable income.
While refinancing has its benefits, it does have one drawback: the loss of access to income-based repayment options and deferment and forbearance. For instance, throughout the coronavirus pandemic, the federal government has suspended payments on most federal student loans. But it hasn’t done the same for private student loans.
5. Use your home equity
If you have a mortgage and equity in your home, some private lenders will allow you to use that home value to make home improvements or pay off credit card debt, personal loans, home improvements, and student loan debt.
Cash-out refinancing for student loans will increase your mortgage, which can put your home at risk if you fall behind on new payments. But if you’re in good financial shape and want to save money with a lower interest rate, this option may make sense.
6. Request a deferment or forbearance
The US Department of Education allows parent borrowers to temporarily postpone payments through deferment or forbearance if they’re unemployed or are experiencing financial hardship. While payments are suspended, your loans — especially Direct Unsubsidized loans — will accrue interest. Plus, when payments resume, the accrued interest will be added to your loan balance through a process called interest capitalization.
This process makes these short-term solutions the least attractive of all your options. But it can help if you need a little breathing room to get your personal finances in order. Check out our guide to defer Parent PLUS Loans for more information.
Defaulting on Parent PLUS Loans
Failing to make the monthly payments on Parent PLUS Loans will lead to delinquency, and after 270 days of missed payments, default. What happens if you don’t pay a Parent PLUS Loan? Once you default, the federal government will be allowed to:
garnish your wages
take your tax refund and Social Security Benefits
stop you from taking out new financial aid due to having an adverse credit history
prevent you from getting an FHA Mortgage until you clear CAIVRS
In addition, your loan servicer will report the default status and late payments to the 3 major credit bureaus, which will destroy your credit score.
Most student loan borrowers have 3 options to get out of student loan default: settlement, rehabilitation, and consolidation. A settlement will usually remove the collection fees and save you about 10-15% off the remaining loan balance — and that makes a settlement off-limits for many parents. Rehabilitation gets you out of default in 9 months, and consolidation takes about 2 months.
While filing bankruptcy on Parent PLUS Loans is an option; hopefully, it doesn’t come to that. Ideally, you’ll be able to use one of the options to help you afford the payments on your loan.
If you’d like me to go over your options in-depth with you, schedule a free 10-minute phone call. We’ll discuss your loans at a high level during that call, and I’ll provide you with a few ways to deal with your loans. At the end of our chat, you’ll have the chance to set up a consultation where we can do a deep dive into your loans to figure out the right strategy for you.